The RBA is finally coming around to the fact that the economy is not strong and there is oodles of spare capacity that will not be mopped up for possibly several years.

The RBA were shattered, almost personally, with the low CPI result for Q4 and the jump in unemployment in December. Of vital importance, it has come to the view that the good employment data are not representative of labour force health - unemployment and underemployment are they key.

Wages growth and hence inflation will not pick up while the economy muddles along and the slack in the labour market remains.

Indeed, some basic modelling suggest inflation is more likely to fall below 1% than reach 3% in the next 2 years, even if GDP only marginally undershoots the RBA's very upbeat outlook.

House price are falling: This is good news, for sure, but careful what you wish for. The first few months of 2018 could spell some risks if house price falls accelerate and widen geographically.

The AUD not a major problem for exports/import competing sectors - at between 0.7500 to 0.8000 it is more a stone in the shoe; uncomfortable and slows you down when you are trying to pick up speed. Sub 0.7500 might be needed to see growth and inflation lift.

Buoyant business confidence is not being driven by top line economic growth, rather the squeeze on input costs – eg, wages. This is fine, but not as good for the jobs market if it was because business was booming. This is a vital change in dynamics for analysing the business surveys and what they are saying about the economy.

Capex / public spending are looking good for now: Risks tilting down on an 18 month time horizon especially as several infrastructure projects near completion. This is a risk to the 2019 forecasts,

The market pricing for rates reflects RBAs wonderful “Chatham House” briefing of market economists. They usually take the RBA view (don’t fight the RBA – 'its argument is quite good'). Calling the RBA out for policy failure and those meetings will dry up.

RBA needs to change market sentiment: Low wages data to be released next week may be the catalyst for a sea change.

A low CPI in April, following a soggy GDP result in May and unemployment ticking up to 5.7% might see interest rate cut priced in by mid year.

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth. The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.